Adopting an Open-Book Management System
Freely sharing information can lead to better decisions by employees.
Open-book management—opening up your financial books to all your employees—has been around for almost 40 years, but only in the past 15 years or so has this business-practice philosophy really taken root. Most companies, after practicing open-book management for at least two or three years, become true believers and strong advocates of the practice.
The over-arching idea of open-book management is exactly as it says: All of your financial information is shared with your employees on a regular basis. The goal: By giving employees all relevant financial information about the company, you enable them to make better decisions as workers. This information includes, but is not limited to, revenue, profit, cost of goods, cash flow, and expenses.
Defining the carrot
Before this process becomes meaningful, it’s critical that you first teach your employees a basic knowledge of financial statements. That means teaching them how to read your profit-and-loss statement, your balance sheet, your statement of cash flows, or any other financial reports you might use. They don’t have to necessarily understand all the details, but you should teach them the basics of revenues, expenses, net income, assets, liabilities, cash flow, and equity. Be patient; this will likely take several months of reviewing financial statements before it begins to click with all of your personnel.
Once you teach your employees some basic financial literacy and begin sharing numbers, you must then drive toward some results. In open-book management, one of the key concepts is to choose a measurement that everyone in the company will work toward together. Typically called a critical number, a scorecard number, or a dashboard number, this is a measurement that everyone in the company can focus on. It could be a sales goal, net-income amount or percentage, a gross-margin goal, or even a specific expense line item on which everyone in the company is focused.
Don’t worry about this being the magic number to carry you into the next 10 to 20 years. Try it out. If it doesn’t work, then change it to something else that everyone can be excited about. Our company has practiced open-book management for more than five years, and our goal has changed many times. The concept, however, is the same: Set a goal that everyone feels they have a part in accomplishing.
Once your goal is set, create a reward for everyone in the company when the goal is achieved. In other words, you have to create a stake in the outcome for your employees to be motivated. The reward needs to be a financial incentive—offering a free ice cream sundae isn’t going to cut it.
The idea is to create a system where your employees understand the financial position of your company at all times, whether good or bad. Establish a common, measurable goal that everyone—management, production, sales, and administration—is working toward. By doing so, they will clearly understand that if that goal is met, they will reap a financial reward. Equally, they also understand that if the financial goals are not met, they get no financial reward.
Controlling their own destiny
As with most things in business and life, there are pros and cons to implementing an open-book management system.
In terms of the disadvantages, there is basically one: You are, in fact, opening up your books and exposing the financial side of your business to your employees. This can have some repercussions. First of all, if you’re like most business owners, you are pretty private about your financial information, and the concept of sharing all the financial information with all your employees can be challenging.
For example, some of your employees may resent the amount of compensation paid to the management team if that’s disclosed on a line item in the profit-and-loss statement, which it typically is. Or the production employees could take exception to the amount that the sales team makes. These situations can be resolved as you work through the basic financial concepts of how your company operates. It just takes some work and some patience.
The advantages of an open-book system, however, greatly outweigh the disadvantages. One of the primary benefits is getting your employees completely invested in what they are doing. Having a critical number that everyone in the company is working toward can generate an attitude of cooperation—not tension—between departments. While this doesn’t necessarily happen overnight, getting everyone heading in the same direction while trying to accomplish the same goals can be indispensable to your company’s success.
Another benefit is that your employees will now believe that they have some control over their financial destiny. Granted, they will still rely upon their base wage or salary for their personal living expenses, but that isn’t what separates a satisfied employee from a happy, fulfilled employee. The opportunity to earn a monthly or quarterly bonus (one that your employee isn’t relying upon for personal or family income) can create the right amount of motivation to do an excellent job instead of an acceptable job. That is the primary basis upon which open-book management operates: A company of employees, managers, and owners who are motivated to work in a fashion that will generate the best results—in other words, the greatest profits.
From your employees’ perspective, they make more money when the company is successful. Your perspective, as an owner, mirrors theirs—when your employees are making more money, this means only one thing: You, too, are making more money.
And while making money for all parties involved may be the foundation and motivation of your plan, I would argue this point: Establishing a workplace where everyone experiences mutual success and job fulfillment will end up being more important to the long-term success of your business than any of the extra profits in your or your employees’ pockets.